Short Duration Debt Fund

A short duration debt fund is a type of mutual fund that invests in debt and money market instruments, aiming for a portfolio duration of between one and three years (Macaulay duration).
EXPLORE FUNDS
What is Short Duration Debt Fund
EXPLORE FUNDS
3 min
27-March-2025

A short duration debt fund, also called a short-term debt fund, invests in money market instruments and debt like government securities, commercial papers, treasury bills, and deposit certificates. On SEBI mandates, these funds are not only for the short term but open-ended also. Moreover, a short duration debt fund has the Macaulay Duration, which, simply put, is the weighted average of the number of years in which the present cash flow values equals the cost of investment in a fixed-income instrument for a period of one to three years.

For how long does a short duration debt fund operate?

The fund’s duration is dependent on its underlying securities’ maturity. Duration is also a gauge of the impact on the fund’s value and is based on interest rate fluctuations in the market. If the duration is high, so will the volatility arising from rapidly fluctuating interest rates in the market. Hence, the interest rate risk will also be higher.

Objectives of a short duration debt fund

The fundamental target of a short duration debt fund is investing in secured instruments that are hardly influenced by fluctuating interest rates in the market. Hence, such funds are less affected by changes in interest rates. Moreover, such funds are relatively more stable than long-term debt funds, give higher returns than the Ultra-Short Duration Funds and are quite liquid also.

Benefits of Short Duration Debt Funds

Preferred by Newcomers

Newcomers to the debt market find short-term debt funds ideal since they are usually risk-averse but look forward to decent returns on their investments and also easy liquidity.

Stable Returns

A short duration debt fund gives out more stable returns over short durations owing to interest rate cycles easing and tightening, compared to fixed deposits, Short-term Mutual Funds, or Ultra-Short Duration Funds.

Lower risks

In any adverse market condition, the risk factor is lower since deviations downward are lower, which helps preserve the capital in the long run. However, it may be said that no short duration debt fund is absolutely risk-free.

Higher liquidity

Since short duration debt funds have no lock-in period, they can be sold anytime, particularly during financial emergencies, subject to exit load and tax implications, if any.

The other notable benefits are as follows:

  • Less affected by inflation-related risks since SEBI has mandated following the Macaulay Duration principle.
  • A good investment for earning capital in times of lower interest rates since the value of the fund increases on the spiralling prices of its underlying investments.
  • Higher Yield to Maturity (YTM) since a short duration debt fund also earns from capital gains besides interest/dividend income.
  • Lower risk of default as against credit risk funds since these are mostly investment-grade securities. Any equity investment lower than 65% is not termed equity but a debt fund.
  • There is no lock-in period since these are unregulated broadly and depend on the investment pattern of the fund manager along with the current portfolio allocation of the investor.

Taxation of Short Duration Debt Funds

Debt funds, including short-duration funds, primarily consist of debt securities and are categorized as 'other than equity-oriented funds' for tax purposes. The tax implications for these funds depend on the duration of the investment.

Short-Term Capital Gains (STCG)

  • If the investment is held for less than 36 months, any gains are considered STCG.
  • These gains are added to the investor's taxable income and are taxed at the applicable regular tax rates.

Long-Term Capital Gains (LTCG)

  • If the units are held for 36 months or more, the gains are classified as LTCG.
  • LTCG are taxed at a rate of 20% (plus applicable surcharge and Cess).
  • Investors can benefit from indexation, which adjusts the invested amount for inflation based on the Cost Inflation Index (CII) notified by the government. This adjustment effectively lowers the tax rate on LTCG for these funds.

Conclusion

Short Duration Debt Funds offer a compelling investment option for those seeking to balance returns with risk management. By investing in debt and money market instruments with a Macaulay duration between one to three years, these funds provide a moderate level of interest rate risk while potentially offering better accrual income compared to other short-term instruments. The careful management of credit risk and the relatively straightforward investment process make these funds accessible and appealing to a wide range of investors.

Moreover, understanding the tax implications is crucial for making informed investment decisions. Short Duration Debt Funds are taxed based on the holding period, with Short-Term Capital Gains (STCG) being taxed at regular income tax rates for investments held less than 36 months, and Long-Term Capital Gains (LTCG) benefiting from a lower effective tax rate due to the indexation benefit for investments held 36 months or more.

In summary, Short Duration Debt Funds can be a suitable choice for investors looking for a blend of stability, manageable risk, and potential for moderate returns, making them an attractive component of a diversified investment portfolio.

Essential tools for all mutual fund investors

Mutual Fund Calculator

Lumpsum Investment Calculator

Step Up SIP Calculator

SIP Return Calculator

SBI SIP Calculator

Groww SIP Calculator

Axis SIP Calculator

ICICI SIP Calculator

LIC SIP Calculator

Nippon India SIP Calculator

Kotak Bank SIP Calculator

HDFC SIP Calculator

Frequently asked questions

Are short-term debt funds safe?
Short-term debt funds are relatively safer options for those investors who seek capital preservation and income, particularly in comparison with longer-term bond or equity funds. However, any investor needs to assess all risks associated with such funds carefully, while also considering other factors like sensitivity to interest rate, credit quality, regulatory environment, and liquidity before investing.

What is short-term debt funding?
Short-term debt funding is raising or borrowing capital for a short time period, which is usually under one year, to fund short-term projects or for meeting immediate financial needs. This kind of funding is used commonly by governments, businesses, and individuals to tackle temporary cash shortages, take care of immediate requirements for working capital, or to take advantage of any opportunity that requires fast access to funds.

What is the difference between FD and short-term debt funds?
Fixed Deposits (FDs) and short-term debt funds differ in terms of their nature of investment; varying returns for short term debt funds, while FDs have fixed rates of return; short term debt funds have a higher risk; short term funds also have a higher liquidity than FDs based on its NAV; Fixed Deposits are low-risk since the government insures them through several insurance schemes, whereas short-term debt funds are slightly more risky due to interest rate fluctuations, credit risks that come with underlying securities, as also market volatility. However, they are still considered relatively low-risk investments compared to equities or long-term debt funds. Also, interest on FDs is taxable on the income tax slab rate of the investor, whereas returns from a short-term debt fund are treated as capital gains.

Is debt fund better than FD?
Whether a fixed deposit is better or a debt fund can only be decided based on the investor’s objectives, time horizon, and risk appetite. For those who prefer fixed returns and safety, a fixed deposit can be suitable. Conversely, for those seeking higher returns but with some flexibility and risk, a debt fund is a better choice.

Why should you invest in short-term mutual funds?
A short-term mutual fund is a viable investment option due to its higher stability, liquidity, assured regular income, diversification, accessibility, and capital preservation.

Do short-term funds have an exit load?
Depending on its investment objectives, a short term fund may or may not have an exit load.

Show More Show Less

Related videos

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-qualified limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on Easy EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

GET THE APP

Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.